Turnaround Tools – Cash Flow and Prioritizing Payables

The term “turnaround management” may bring to mind the corporate white knight who rides in to save the day and get a business back on track. An element of truth gives it a certain romantic appeal.

But the term more accurately refers to that point after a company has filed for bankruptcy and has entered receivership. In other words… creek… no paddle.

Cash flow and prioritizing payablesCash is King (thank you Luis Pereiro). You can have an unprofitable company, so long as you are able to meet your cash obligations. You can have the best company in the world with high profits, but if you cannot meet your payments the company will fail.

There are tactical financial advantages to declaring bankruptcy. But there are tools available that, seem to me, a prudent executive should apply before liquidation is taken as a last resort.

If you find yourself in temporary cash crisis prioritize your payables in order of strategic importance. Your analysis will be have customized to the needs and capabilities of the company. As I consider it, why wait until there is a cash crisis? Perform the analysis and make the conclusions part of your standard financial policy.

An example of the priorities and reasoning:

Employees

Communications

Utilities

Transportation

Raw materials

Bank

All others

Employees. The most significant threat to any organization is when the employees lose confidence in the company. Your employees are the people who will implement the company-saving solutions. You are obligated to openly and honestly communicate problems to them. If people are not paid or if they are paid late, it is an indication of instability. They will lose motivation or leave. Your capabilities, institutional knowledge, and your ability solve problems goes out the door with them.

Communications. Communications in this context refers to the physical capability of communicating and includes fixed lines, mobile lines, and Internet connectivity. A company cutoff from customers and suppliers or which cannot maintain internal communications sends a message of uncertainty. Uncertainty is dangerous for any company because it suggests volatility. Without communications you cannot contact customers, develop new business, or coordinate internally.

Utilities. You need to keep the lights on. No modern business can operate without utilities to power computers, a manufacturing line (if there is one), or simply maintain a workplace.

(You have the opportunity to be creative with internal and external negotiations with every item below this line.)

Transportation. Transportation is obviously important to visit customers and for the transportation of raw materials and finished goods. In a cash crisis situation, perhaps alternative solutions can be found to extend cash: per mile reimbursement instead of leased cars, Uber, third party logistics instead of the capital investment of a corporate fleet.

Raw materials. Cash flow can be possibly improved with an analysis of inventory management with the goal to reduce inventory while improving efficiencies. Renegotiate suppliers’ payment terms (make them longer) to help finance the inventory and improve your cash cycle.

(A quick aside here… Unrelated to raw materials but related to cash cycle, now is a good time to review your customers’ payment terms. Make them shorter. You may be hurting your own cash position by overextending terms to your clients. You finance their companies at the expense of your own.)

Bank. Banks exist to make money. It is expensive for them to lose money through bankruptcy. Do not mistake this fact for having an advantage in a refinancing negotiation. A quick loss is better for a bank than a long, drawn out loss. If your bank relationship is strong you should be able work out temporary arrangements to improve your cash flow. Be aware that risk equals higher interest.

All others. For example, dividend payments.

Shareholders will support the long-term value of a going concern over a short-term dividend payment and (I would hope) forego the fast cash.

Conclusion
Cash prioritization seems simplistic, but its simplicity makes it easy to ignore. There is usually no single solution for every business problem, but it is wise to review the business basics. If you go into liquidation, the above techniques will be the same used to restructure the company.

Companies die the deaths of a thousand cuts – usually paper cuts.

Bow to the king – Cash! Don’t wait until bankruptcy to use your cash in the most efficient ways possible.